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Consider a bank with the following balance sheet: Assets: Reserves $100K and Loans $1 million. Liabilities:...

Consider a bank with the following balance sheet: Assets: Reserves $100K and Loans $1 million. Liabilities: Checking Deposit $1 million. Net worth: $______

imagine instead that 5% of the loan portfolio fails.

i) Show the updated balance sheet, including changes to loans and net worth

ii) What is the leverage ratio now?

iii) If the maximum legal leverage ratio is 20, how much of its assets (and liabilities) must the bank sell off, in order to be in compliance?

iv) Alternatively (to (iii)), instead of shrinking the asset base, how much new capital could the existing shareholders be required to put up, in order to bring the business back into compliance with the maximum legal leverage ratio

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